Icahn likes Transocean, should you?

Shares of rig operator have gained more than 30% in the past year

Fire boat response crews battle the blazing remnants of the off shore oil rig Deepwater Horizon, off Louisiana, on April 21, 2010.

SAN FRANCISCO (MarketWatch) — Billionaire and activist investor Carl Icahn has piled into shares of Transocean Ltd., and wants more. Should you?

The rig operator and offshore driller on Sunday disclosed Icahn holds a 1.56% stake in the company, in addition to a derivatives position. The company said he intends to buy more than $682 million worth of stock, implying he’s seeking at least 3.5% of Transocean’s shares outstanding.

That would make Icahn the second-largest shareholder in Transocean. The Capital Group Cos. and Franklin Mutual Advisers LLC are the top two institutional shareholders, according to FactSet Research.

Shares of Transocean
RIG, +2.09%
on Monday declined 0.1% after starting the trading day in the black. Energy companies on the S&P 500 collectively declined 0.2%.

Shares hit $56.34 on Monday, their highest since April.

The timing of Icahn’s buying spree wasn’t disclosed. Transocean earlier this month settled with the U.S. government, agreeing to pay $1.4 billion for its role in the Deepwater Horizon explosion and oil spill.

Transocean owned Deepwater Horizon, the rig that drilled BP PLC’s ill-fated Macondo well and exploded in April 2010, killing 11 workers. The gushing well fouled Gulf waters with millions of gallons of oil for months.

“The settlement took a significant unknown out of [Transocean] stock,” said Matt Conlan, a senior analyst with Wells Fargo.

Transocean still doesn’t have Macondo-related liabilities “completely behind them,” but that’s likely the lion’s share. Wells Fargo estimates private settlements could cost the company somewhere around $500 million to $600 million. Wells Fargo has a “buy” rating on the stock, and a 12-month price target around $60.

Transocean’s shares have advanced more than 30% in the past year, compared with gains of 14% for the S&P 500 in the same period.

But shares traded at $141.75 in January 2008, and peaked at $161.40 that May. They were trading at $85 just before the Deepwater Horizon disaster.

The company has made strides in the past year, increasing the utilization rates on some of its more profitable rigs. That rate hovered around 70% in 2011 and 77% last year; Conlan sees it around 83% in 2013.

Icahn hasn't disclosed his intentions in becoming a top Transocean shareholder and few analysts tried to read the tea leaves.

Goldman Sachs analyst Waqar Syed said in a note to clients Monday possibilities include a resumption of dividends or a push toward restructuring the company as a master limited partnership, or MLP, neither of which is likely to be achieved this year.

For the dividends, Transocean’s board would have to make a decision in February for a shareholder vote in May.

“Given that the Macondo issues are not yet fully resolved and the balance sheet doesn’t have full flexibility in terms of a dividend payment, we do not believe that Transocean’s Board will recommend a dividend in February,” Syed said.

In terms of the MLP, only one offshore rival — Seadrill Partners LLC — has adopted the structure, the analyst said. Seadrill has a relatively new drilling rig fleet and different capital needs, he added.

“While we believe that Transocean, like most other offshore drillers, will evaluate this structure, we don’t believe that there is high likelihood of adoption in 2013. Transocean’s rig fleet and capital needs are different, and it is unclear how Transocean would fare through a complete drilling cycle in an MLP structure,” Syed said.

Analysts at Barclays also zeroed in the MLP structure.

“We believe the focus would be forcing the company to MLP some of its deep water assets. Additionally, Transocean is holding a significant amount of cash,” they said.

The company holds about $6 billion in cash and $14 billion in debt. After the government settlement and a five-year payment schedule with the Department of Justice it has “ample flexibility” to draw back to a targeted cash balance around $1.5 billion, analysts at Simmons & Co. said in a note.

The Simmons analysts also argued that Icahn might have turned to Transocean a bit too late.

One could argue Transocean was a better investment a year ago, before gaining traction on the settlement and making strides in other areas, they said.

There remains, however, “one glaring catalyst that perhaps most likely explains Mr. Icahn’s attraction and that, we surmise, is the prospect of extracting or perhaps accelerating a cash distribution yield out of [Transocean] now that the Macondo overhang has been substantially mitigated,” they added.

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